I’ve minced no words about my expectations for interest rates.
More than a year ago, in 2012, I said long-term bond prices would plunge and long-term rates would surge. They did. In fact, 2013 is shaping up to be one of the worst years ever for the bond market.
Then, earlier this year, I predicted a second leg to this move. I said that short-term yields would start rising. And they have — sharply.
What do I mean? Well, the government just auctioned a fresh round of 1-month Treasury bills — something it does frequently. But the auction was anything but normal.
The Treasury had to pay a whopping 0.35 percent in yield to borrow money for only 28 days. That’s a stunning 46 times the 0.0075 percent that 1-month bills were yielding only a month ago.
Not only that, but it was also the highest yield for a 1-month bill going all the way back to the fall of 2008. That’s when Lehman Brothers was in the process of going bankrupt and the credit markets were coming apart at the seams. Look at the following chart and you’ll see how this key indicator of market stress is surging.
The immediate cause of this week’s interest rate dislocation was the latest bout of shenanigans in Washington. I laid out my thoughts about what to expect there last week. But suffice it to say, the closer we get to the debt-ceiling deadline, the more these concerns will ratchet up.
If a deal is reached, a portion of the move higher in short-term yields will likely ease. But the longer-term forces at work will not go away. The fact is, we are now on the cusp of a slow and steady unwinding of the massive, easy money-driven, Federal Reserve-fueled bond market bubble.
|It will take years for the bond market bubble to unwind.|
That unwinding process won’t be over in a few weeks or months. It won’t move in a straight line. But it will happen, and it will take years. So even if short-term yields settle down for a bit, I believe they’re going to start climbing again … and keep on rising.
That’s going to prove incredibly toxic for many fixed-income investments — a key reason why I recommended investors dump virtually all their bond exposure many months ago. If you haven’t done so already, I recommend you get out of longer-term mortgage bonds, Treasury bonds and municipals, in favor of floating-rate notes or very short-duration, fixed-income ETFs.
If short-term rates move higher right alongside longer-term yields, it should also prove to be a headwind for many interest-sensitive stocks. Indeed, some of the sectors I specifically singled out a long time ago — such as real estate investment trusts (REITs) — have been absolutely pummeled in the past few months.
The benchmark iShares U.S. Real Estate ETF (IYR) has given up all of its 2013 gains, for instance. Anyone who bought it at the spring peak has lost roughly 17 percent of his money. So I’d continue to avoid these vulnerable sectors, or look for select downside put option or inverse ETF plays there.
Finally, I continue to be wary of the “worst case scenario” I discussed last week. On several recent days, bonds have either not bounced at all in price — or declined in value — even as the stock market tanked. That’s not what many on Wall Street claimed would happen, and it likely reflects wholesale dumping of U.S. assets.
Should that process accelerate, things are going to get real ugly, real fast. That’s why I’ve been hedging and taking more profits off the table in the investment services I maintain. If you want to join in and get more details about my strategies, especially in light of the latest interest rate volatility, all you have to do is click here.
Until next time,